How does contract costing differ from job costing?

Contract Costing vs. Job Costing:

1. Definition:

1.1 Contract Costing:

• Contract costing is a method of costing used when the work is undertaken to customer's specific requirements and each contract is treated as a separate cost unit. It is used in industries such as construction, shipbuilding, and civil engineering, where large projects are undertaken for specific clients.

1.2 Job Costing:

• Job costing is a method of costing used when the work is undertaken to customer's specific requirements but where each unit of production is separately identifiable. It is used in industries such as printing, engineering workshops, and custom furniture manufacturing.

2. Nature of Work:

2.1 Contract Costing:

• In contract costing, the work is typically of a long-term nature, spanning several months or even years. The costs incurred are accumulated over the duration of the contract and are only transferred to the profit and loss account upon completion of the contract.

2.2 Job Costing:

• In job costing, the work is typically of a shorter duration, often completed within a few days or weeks. The costs incurred are accumulated for each job and are transferred to the profit and loss account upon completion of the job.

3. Cost Unit:

3.1 Contract Costing:

• The cost unit in contract costing is the entire contract. All costs incurred in relation to a specific contract are accumulated and allocated to that contract. The total cost of the contract is then divided by the number of units (e.g., buildings, ships) to determine the cost per unit.

3.2 Job Costing:

• The cost unit in job costing is the individual job. All costs incurred in relation to a specific job are accumulated and allocated to that job. The total cost of the job is then divided by the number of units produced to determine the cost per unit.

4. Accounting Treatment:

4.1 Contract Costing:

• In contract costing, a contract account is opened for each contract to record all costs incurred and revenues earned. Costs are accumulated in the contract account and are transferred to the profit and loss account upon completion of the contract.

4.2 Job Costing:

• In job costing, a job cost sheet is prepared for each job to record all costs incurred and revenues earned. Costs are accumulated on the job cost sheet and are transferred to the profit and loss account upon completion of the job.

5. Examples:

5.1 Contract Costing:

• Examples of industries where contract costing is used include construction (building of bridges, roads), shipbuilding (construction of ships), and civil engineering (construction of dams, pipelines).

5.2 Job Costing:

• Examples of industries where job costing is used include printing (printing of books, magazines), engineering workshops (manufacturing of custom machinery), and custom furniture manufacturing (manufacturing of bespoke furniture).

6. Conclusion:

• In conclusion, contract costing and job costing are both methods of costing used to determine the cost of production for specific customer requirements. While contract costing is used for long-term projects where the entire contract is treated as a cost unit, job costing is used for shorter-term projects where each unit of production is separately identifiable. Both methods are essential in industries where customized products or services are provided to customers.